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PRINCIPLES OF
MICROECONOMICS
LECTURE 3
14/09/2014
Opportunity Cost
Highest valued alternative forgone
Example: pizza vs. burger. Opp. cost of producing an additional pizza is the no. of
burgers we must forgo.
To produce 1 additional pizza you need to give up 3 burgers. To produce 1
additional burger you need to give up 1/3 pizza.
Opp. cost is a ratio:
Inverse relationship
PPF is bowed outward
Opp. cost of a good increases as quantity produced of the good increases
Resources are not equally productive in all activities
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Economic Growth
Expansion of production is called economic growth
Technological change and capital accumulation
Economic growth shifts PPF outward enabling increased consumption of both
goods
More consumption today means less capital investment today- PPF remains almost
the same
More current investment enables PPF to shift outward and more economic growth
is achieved
The nearer a country is to the consumption goods side on PPF the slower the
economic growth is for that country.
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Trade
Specialization- concentrate on producing goods/services one does the best
Comparative advantage- ability to produce a good at a lower opportunity
cost than another producer
Absolute advantage- ability to produce a good using fewer resources (eg.
fewer labor, capital etc.) than another producer.being more productive
Trade
Comparative advantage reflects relative opportunity cost of two producers
producing the same good
The person having lower opportunity cost specializes in that sector and
sells (export) that good in exchange for the other good (import)
Practice problem
There are two countries- Home and Foreign, both countries produce Good 1 and Good 2.
Each country has unit labor requirement as follows:
Good 1
Good 2
Home
Foreign
Announcement
QUIZ 1 on next Sunday, 21st September
Syllabus- lecture 1, 2, 3
MCQ & short question/graphs
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